In a new report released on Friday 13 November, the European Securities and Markets Authority (ESMA) asked managers of harmonised investment funds in the EU to better prepare for possible future adverse shocks that could lead to a deterioration in the liquidity of financial markets.
At the beginning of the Covid-19 pandemic (see EUROPE 12461/12), ESMA had already noted that a number of investment funds were showing “signs of stress”.
The report responds to the recommendation of the European Systemic Risk Board (ESRB) that ESMA work with national competent authorities to coordinate a targeted monitoring exercise on investment funds that have significant exposure to corporate debt and real estate assets, in order to assess the preparedness of these two segments of the investment fund industry for possible future adverse shocks, including any potential resumption of mass redemptions or increased market price volatility.
The results of the exercise show that the funds examined were generally able to maintain their activities adequately in the face of a situation in which a significant number of investors reduced or even withdrew their holdings in a fund within a very short period of time (‘redemption shock’).
But the exercise also revealed gaps that need to be filled in order to improve the preparedness of the funds for future shocks, particularly in terms of supervision.
ESMA also recommends increasing the availability and use of liquidity management tools. In this respect, it encourages the Commission to come forward swiftly with proposals to amend the EU legislative framework to ensure that liquidity management tools are widely available to asset managers across the EU (see EUROPE 12587/30).
See the report: https://bit.ly/3eXCpwc (Original version in French by Marion Fontana)